Finance Bill 2016: Company Distributions

In the Autumn Statement the Chancellor announced changes to the taxation of distributions from companies, focusing on changes to the transactions in securities legislation. These changes have been set out in draft legislation forming part of the Finance Bill 2016, and comments have been sought in a consultation document published on 9 December 2015.

There has been anti avoidance legislation in relation to transactions in securities for many years, designed to ensure that if amounts are taken out of a close company in a capital form that could have been paid out as dividends and there is a tax avoidance motive, income tax is charged to recover tax that HMRC regard as having been avoided.

In particular, attention has been focused on the following areas:

  • A disposal of shares to a third party;
  • A distribution made in a winding up;
  • A repayment of share capital;
  • A purchase of own shares.

Where there is a bona fide sale to a third party the transactions in securities legislation is unlikely to be relevant. However, HMRC are concerned about situations where, for example, the vendor has retained profits in the company with a view to selling those profits in a capital form.

HMRC are also concerned about situations where there is a partial sale to a third party, but the original shareholders continue to have a significant interest in the company following the sale. In order to address this situation changes to the fundamental change of ownership provisions that provide an automatic let out in respect of the transactions in securities legislation.

Distributions made on a winding up are of particular concern to HMRC where, for example, the shareholders retain profits in excess of the company’s commercial needs so as to receive those profits in capital form; or where a company goes into liquidation but the same or a similar trade is carried on by the shareholders or by a new company owned by the shareholders.

Phoenixing is already caught by the transactions in securities legislation, but the proposals extend the type of transactions that are caught. From 6 April 2016, it will no longer be possible, for example, to use a separate SPV for property development projects, unless it can be demonstrated that the arrangements do not have a main purpose, or one of the main purposes, of obtaining a tax advantage.

A repayment of share capital is usually not taxed as a dividend, and this will continue to be the case where the share capital represents money injected into the company. However, HMRC are seeking to counter situations where share capital is created by means of a share for share exchange, and that enhanced share capital is then returned to the shareholders.

Under current rules it is possible for a company to buy back a shareholder’s shares but for that shareholder to retain a significant interest in the company. The government is considering whether the rules regarding purchase of own shares should be changed so that a shareholder would have to sell a larger proportion of their shares in order to get capital gains tax treatment for the sale to the company.

The proposed changes are wide ranging, and will have a significant impact on the taxation of a wide range of transactions involving shares in a close company. Companies contemplating any transaction involving their shares should do so in good time, before 1 April 2016.